Historically, mutual funds have not possessed specific information about the identities of their individual customers, nor have they verified the identities of their customers. Mutual funds typically do not interact directly with their customers, often instead employing transfer agents to receive, review and process documents such as applications for new accounts. It can be appreciated that this way of doing business in the financial industry has created a high degree of anonymity between mutual funds and their customers.
In association with enactment of the USA PATRIOT Act (“Patriot Act”), the Treasury Department and the Securities and Exchange Commission were directed to develop rules and regulations for implementing customer identification programs (“UP”) to address the need to verify the identities of customers of financial institutions such as mutual funds. To satisfy the requirements of the Patriot Act, mutual funds and other financial entities have been mandated to establish and execute such CIPs in their business operations. A properly administered CIP requires financial institutions to undertake “reasonable procedures” for verifying the identities of their customers, to maintain customer verification records, and to compare customer information against certain government lists (e.g., government lists of known terrorists). It can be seen that enactment of the Patriot Act has forced a fundamental change in the nature of the relationship between mutual funds and their customers and how mutual funds must conduct business.
In view of the compliance issues arising from this regulatory environment, effective and efficient processes are needed for obtaining, processing and storing identifying information for customers of financial institutions, including mutual funds.